Is it possible to upgrade from Server 2000 to server 2003 on a DC with Exchange 2003?

We are planning to transition to a new 2008 R2, Exchange 2010. Unforunetely I can not upgrade the AD to the minimum requirement of 2003 native due to the a 2000 server as one of the DC. This 2000 server also is the exchange server 2003. So, i need to get rid of the server 2000 so I can get the AD to 2003 or better for the exchange 2010 implementation.

Can you upgrade the OS of an exchange server / DC from server 2000 to 2003? Will this break the AD or Exchange?

Theoretically it is possible. However, my experience has shown that upgrading domain controllers sometimes leads to problems, and it's always better to rather load a machine from fresh. However, in your situation having Exchange on the box complicates matters. You have mentioned that this is just a step in the transition to the new environment, so it's probably worth doing a simple in-place upgrade as it won't be around for long. My only recommendation would be to ensure that you have the means to recover the box in the event of something going wrong. If possible, get a complete image of the system drive.